1.4 Government Intervention Flashcards
(20 cards)
What is the purpose of government intervention in markets?
To correct market failure and provide goods like healthcare and education that the free market underprovides.
What are indirect taxes?
Taxes on expenditure that increase production costs for producers.
Footnote ##
Used to internalise (bear the consequence of) negative externalities.
What is an example of an ad valorem tax?
VAT, which adds 20% of the unit price.
How does the incidence of tax vary?
It can fall differently on consumers and producers depending on price elasticity of demand.
What effect do indirect taxes have on demerit goods?
They discourage consumption and reduce negative externalities.
What is the impact of subsidies on merit goods?
They encourage consumption by internalising external benefits.
What is a minimum price?
A price set by the government to discourage consumption or production of a good.
Provide an example of a minimum price.
The National Minimum Wage.
What are tradeable pollution permits?
Permits that limit pollution and can be bought and sold between firms.
What is one advantage of tradeable pollution permits?
They encourage firms to adopt green production methods.
What is a disadvantage of tradeable pollution permits?
Firms may relocate to avoid pollution limits.
What are public goods?
Goods that are underprovided in the free market such as education and healthcare.
What is the role of government in providing information?
To ensure there is no information failure, allowing informed economic decisions.
What is one example of regulation by the government?
The minimum school leaving age.
What is government failure?
When government intervention worsens market failure or creates new failures.
List four causes of government failure.
- Information Failure
- Excessive administrative & enforcement costs
- Regulatory Capture
- Unintended consequences
Why does a lack of information cause government failure?
Policymakers may misjudge costs/benefits due to limited or inaccurate info, leading to poor decisions.
How do high policy costs cause failure?
Policies may cost more to run than the benefits they bring, making them inefficient.
What are the unintended consequences of policy?
Unexpected outcomes like black markets, firm closures, or overreliance on subsidies.
What is regulatory capture?
When regulators favour firms over the public due to industry influence or connections.
